The Paradigm Cycle Model

Over the last four years I have written about a variety of cycles I employ
to develop economic or financial forecasts. The Stock Cycle1 defines
secular bull and bear markets and was used to forecast that money markets would
outperform stocks for twenty years in my 2000 book Stock
Cycles. The Kondratiev cycle2 defines long-term movements
in interest rates and commodity inflation. This cycle forecasts that 10 year
interest rates won't rise above 5.5% in the coming years.3 The political
cycle4 suggests that the decline in small government conservatism
since 2000 is not a transient anomaly, but the beginning of a long-term trend.
The hegemony cycle projects that there will be no showdown between the U.S.
and China in this decade and that Asian central banks will continue to support
US borrowing when necessary for the rest of the decade.

I believe all these cycles are linked in that they are all generational in
nature and act largely through politics. Government and other institutional
behavior shapes the socioeconomic landscape, giving rise to historical cycles.
This behavior reflects the beliefs of the people occupying the top positions
in government, business and other institutions. I hypothesize that beliefs
change in a predictable fashion because the changes arise out of the replacement
of one generation by another, each with its own particular set of beliefs.
This article presents my paradigm model for how these generations and the cycles
they create arise.

The paradigm model is closely associated with the political cycle I presented
last November.4 Table 1 presents this cycle in terms of the liberal
eras that make up one half of the cycle. As described in my book Cycles
in American Politics, the political cycle aligns with the Strauss and
Howe generational cycle called the saeculum.
Specifically, liberal eras tend to occur at the same time as social moments.
A social moment is an era, typically lasting about a decade or two, when people
perceive that historical events are radically altering their social environment.5 There
are two types of social moments: secular crises, when society focuses
on reordering the outer world of institutions and public behavior; and spiritual
awakenings, when society focuses on changing the inner world of values
and private behavior.5

Table 1 shows dates for particularly significant elections called critical
elections. Included amongst these is the date for another significant political
milepost, American independence. Also shown are mileposts from two financial
cycles which are related to the political cycle. After the 1920's the Stock
Cycle correlates well with the political cycle and the saeculum. Secular bull
market peaks are shown to represent this cycle. Before the 1920's, the real
estate or Kuznets cycle6 was best correlated with the political
cycle and the saeculum. This cycle is represented in Table 1 by pairs of adjacent
financial panics.

The paradigm

The mechanism I propose for the political cycle, the modern saeculum and their
related economic cycles involves the paradigm. A paradigm is a model
of the world that people use to make sense of the social, political, economic
and cultural world they inhabit. A person's behavior is influenced by his paradigm,
which acts as sort of a road map for life. A paradigm is largely based on personal
experience and everyone's is different.

According to the paradigm model, social, economic and political trends, as
the collective behavior of society, reflect its collective paradigm. A collective
paradigm is the "average" paradigm of a group of people and as such, many differences
between individual paradigms "cancel out" leaving those features that are widely
shared. Social trends reflect the changing nature of commonly held ideas in
individual paradigms. For example, the decline in crime rates over the last
decade and a half represents a change in attitudes towards crime amongst young
people. Although there are still plenty of individual paradigms that hold that
crime does pay, they are less common than in the past. The collective paradigm
of the young today is less pro-crime than in the past and as a result they
engage in less crime

A group of people sharing a common collective paradigm due to the proximity
of their birth years is called a paradigmic generation. Paradigmic generations
are very similar to the psychological generations proposed by Strauss and Howe.5 The
exact dates for paradigmic generations are slightly different from those of
Strauss and Howe, but there is a good deal of overlap between the two. In this
article, I will refer to the two interchangeably as I believe that my paradigm
model captures the same dynamic described by Strauss and Howe in their work.

What separates generations is the influence the past has had on their collective
paradigm. A younger generation only knows the recent history through which
they have lived, whereas an older generation's paradigm is influenced both
by the recent past and an earlier time that they know but the younger generation
does not. Current events and the recent past will necessarily affect the paradigms
of the young adults more strongly than those of older adults.

When recent history has been particularly eventful, the impact on paradigms
is heightened. A momentous era in history (i.e. a social moment) will strongly
imprint the paradigm of those coming of age during the social moment, binding
them together into a common generational outlook. People coming of age just
before and just after the social moment will fall into different generations.
The recent film Seabiscuit illustrates this concept. One of the film's
characters, the jockey, was raised in an erudite, professional household. His
course in life was changed dramatically by the Depression. In ordinary times
he would have gone to college, gotten a professional job and led a comfortable
middle class life. But the Depression wiped out his family's finances and he
was left on his own to make his way as a small-time pugilist and eventually
as a jockey. The common experience of coming of age in the Depression and WW
II shared by those born in the early 20th century is what binds
them together as what Tom Brokaw8 calls "The Greatest Generation" and
Strauss and Howe call the GI Generation.

Generations formed by the experience of coming of age during a social moment
are called dominant generations, while those coming of age at other times are
recessive. Thus, the GI generation is a dominant generation while the Silent
generation that follows them is recessive. Similarly, the Baby Boom generation
who came of age during the tumultuous "New Consciousness" spiritual awakening
(1964-84) is dominant while Generation X is recessive. It is the paradigms
of dominant generations that shape the political zeitgeist.

For example, the GI generation was tempered by the fire of depression and
war. They knew that long-term unemployment was something that can just happen
to people through no fault of their own. In addition, the experience of the
GI's with the New Deal and WW II had created faith in government as part of
what I call their "Progress through Public Action" paradigm. In contrast, the
experience of the dominant Baby Boomer generation coming of age during the
New Consciousness social moment (1964-1984) created a very different view of
government in their collective paradigm. During this social moment they saw
the nation defeated in war for the first time, a president resign in disgrace,
and an economy seemingly running out of control with something called stagflation.
The first wave of Boomers (1943-60) came of age protesting the government while
the last wave came of age with a popular president proclaiming "Government
is the problem". The Boomers came to put their faith in the free market and
in private behavior. That is, their "Self Actualization" paradigm is opposed
to the Progress through Public Action paradigm, despite the fact that most
Boomers take for granted the government benefits and protections introduced
in support of the GI paradigm.

The paradigm cycle model

Table 2 lists the historical paradigms that were created in each liberal era/social
moment. An oscillation between "freedom" and "progress" is described. Both
of these themes were present at the birth of our nation. The Revolution was
about the desire for self-rule (Freedom) and the Novus Ordo Seclorum that
it created represents a step forward in human development (Progress). During
the spiritual awakening, when the focus is on the inner world, the paradigms
formed emphasize individual freedom. These paradigms tend to be idealistic
and impractical. Conversely, the paradigms formed during the secular crisis,
when the institutions of society are retooled, focus on progress. They tend
to be pragmatic and call for collective action. Social moments are times of
vigorous national activity, times of activist government, and should naturally
coincide with liberal political eras.

Table 2. Historical paradigms

Gen Type

Paradigm

Midpoints of

Crit. Elect.

Spacing

Lib. Eras

Social Moment (type*)

Panics & Sec.
Bear Markets

Civic

Progress

1776

1781 (C)

--

1776

--

--

Freedom (classical liberalism)

1808

--

--

1800

28.0

Idealist

Freedom (practical liberalism)

1834

1830 (A)

1828

1828

27.0

Civic

Prog via Public-Private Coop

1866

1861 (C)

1863

1860

32.5

Idealist

Freedom (restricted)

1909

1895 (A)

1900

1896

37.5

Civic

Prog via Public Action

1938

1938 (C)

1939

1932

36.8

Idealist

Self Actualization (Freedom)

1971

1974 (A)

1974

1968

35.0

Civic

??

2010

2015 (C)

2010

2004

38.0

*C refers to a secular crisis and A to a spiritual awakening.

The idealistic Freedom paradigms tend to rise in opposition to the pragmatic
Progress program of the elder generation. People often don't like some of the
sacrifices called for by progressive policies (e.g. high taxes and the military
draft in the last spiritual awakening). Conversely, pragmatic Progress paradigms
tend to rise because of a perceived problem (e.g. unemployment during the great
Depression) that is not being effectively addressed by policies favored by
leaders holding Freedom-type paradigms. That is, a perception that government
is doing too much helps create a Freedom paradigm, while a perception that
government is not doing enough creates the Progress paradigm.

Young people develop a paradigm that reflects their experience of living through
history during a social moment. It is the acquisition of a paradigm that creates
the generation out of the young adults of the time (history creates generations).
The social moment itself reflects the policies of the older generation (generations
create history). These policies reflect the paradigms held by that older generation,
which were created during the previous social moment. History creates generations,
which, after a lag, create history. The lag reflects the time between paradigm
acquisition in young adulthood and paradigm expression in middle age.

This idea can be made concrete by defining a generation as those who experience
the liberal era/social moment at a particular age when paradigms are formed
(APAR). For our purposes let us assume that APAR is age
25. In this case, a generation is defined by subtracting 25 from the dates
for the liberal era/social moment. Table 2 presents midpoints for liberal eras
and social moments and their associated economic cycles. By subtracting 25
from them, one obtains the midpoint of the generation birth years whose paradigm
was created in that era. The paradigm model says that the next social moment/liberal
era should begin when this generation reaches the age when they occupy the
maximum number of positions of power. I call this age AMAX and a
good estimate for it would be the average age of Congressmen and governors.9 This
age is given in Figure 1.

This says that the next liberal era/social moment should begin AMAX minus
25 years after the midpoint of the previous era. Because liberal eras average
15 years long, the time from the beginning of a liberal era to its midpoint
is 7.5 years. From this it follows that liberal eras/social moments should
be spaced AMAX - 17.5 years apart. Figure 1 plots this quantity
and also the spacing between eras given in Table 2. Spacing has lengthened
over the past two centuries in line with the increase in AMAX. I
should stress that the spacing given in Table 2 for today's era is a minimum
value. It is not yet clear that a liberal era/social moment began in 2001 or
that 2004 was a critical election. The only thing that seems fairly sure is
that the secular bull market ended in 2000. Should it turn out that the new
era didn't start in 2001, but instead will begin at a later date, this would
increase the spacing, moving the red dot upwards in Figure 1. Should this occur
it would fit the paradigm model even better than the dates I am using now do.

This correspondence between spacing and AMAX provides the primary
evidence in favor of the paradigm model. Another factor in its favor is it
explains the changes in the length of the Strauss and Howe saeculum since 1820.
Up until this date, the spacing between social moments averaged 51 years.10 The
spacing between the next pair of social moments was only 31 years (see Table
2), and the three after that average 39 years, considerably shorter than what
they were before 1820. Strauss and Howe explain this with what they call the
Civil War anomaly. The Civil War came about a decade early, which resulted
in a greatly shortened Civil War social moment and the dropping of a civic-type
generation.5 Had the Civil War not come early, the first spacing
would be around 40 years, in line with the next three, but still shorter than
the previous ones. Strauss and Howe also argue that generation length has shortened
since 1820, reflecting a faster pace of life.10 Thus, Strauss and
Howe have added two modifications to their generational model to explain post-1820
cycle shortening.

The paradigm model is considered to have come into play only after 1820. A
spacing of 30-40 years observed for social moments is consistent with AMAX values
of 47-57 years, close to the 47-56 year range shown in Figure 1. Prior to 1820,
a different mechanism, closely related to the Kondratiev cycle, was in operation.
This mechanism is described in detail in my book The
Kondratiev Cycle.11 It calls for the spacing between social
moments to be two biological generations, about 50 years or one Kondratiev
cycle, which is what is observed. I employ only one assumption (the rise of
the paradigm mechanism) to explain cycle shortening. Furthermore, the observed
cycle lengths are consistent with independently observable phenomena: biological
generations and rising longevity (AMAX).

The origins of the paradigm

The origins of the paradigm mechanism for cycle generation were in the aftermath
of the Revolutionary War secular crisis, in the emergence of the first political
divisions in the new nation. The first "Progress" paradigm arose out of support
for George Washington, hero of the Revolution, and was based on the progressive
ideas of Alexander Hamilton, Washington's aide during the war and Secretary
of Treasury in his administration. The first "Freedom" paradigm was based on
the libertarianism touted by Thomas Jefferson in opposition to Hamilton's Federalists.

Federalists called for a national army and navy, with high taxes to pay for
it. The government was to balance its budget and pay its debt. They favored
a central bank (like Britain had) and a tariff to encourage domestic industry.
These things, they argued, would bring prosperity and allow the United States
to develop into a great nation; they represented Progress. Jefferson, for
his part, argued that Federalist "Progress" hurt rather than helped the common
man. Most Americans were farmers, not industrialists, merchants or financiers.
Jeffersonians believed that American "yeoman" should be left alone (Freedom)
to pursue their own lives.

Federalist thinking justified the Federal government's decision to honor Revolutionary
War bonds at full value. These bonds had been issued by the Continental Congress
to fund the war and had long since become worthless. Federalist speculators,
who had bought Continental bonds for pennies on the dollar, pressed their fellow
Federalists in office for this policy and made vast fortunes as a result. Increased
taxes were required to pay the speculators, which were raised via excise taxes
on whiskey and other goods. These taxes led to the Whiskey Rebellion, which
Washington put down by force of arms. As this example shows, it is not hard
to see how Jefferson's opposition to the Federalists (once their icon George
Washington had left the scene) could have broad emotional appeal for rank and
file Americans.

In 1800, Jefferson was elected president and the Federalists were swept from
power. This realigning election was the first of a regularly-repeating series
of critical elections that shifted power from one group to another.
Critical elections are associated with liberal political eras and, after 1820,
social moments too (see Table 1). Once elected, Jefferson and his successor
Madison found that the realities of governing were incompatible with their
idealistic program. One by one, they discarded its elements until by the end
of Madison's second term, their party was essentially ruling like the Federalists
they had so despised in 1800.

This should not have happened according to the paradigm model, Jefferson and
Madison should have stuck to their paradigm, which would have caused a secular
crisis and the formation of a progressive counter paradigm. Instead they pragmatically
adopted Federalist-style progressivism. Both Jefferson and Madison were members
of a Civic-type generation rather than the Idealist generation that is normally
characterized by Freedom-type paradigms. The paradigm model was not yet fully
operative before 1820. What had happened was the same generation of Civics
were split into two paradigmic camps, represented by the Federalists and Jeffersonians.
The latter imbued a younger generation with their Freedom paradigm, but then
proceeded to become progressives (to which, as pragmatic Civics, they were
naturally inclined). When this younger generation came to power in the 1820's
they became Jacksonians in rejection of neoFederalism. They triumphed in the
election of 1828, our nation's second critical election.

The time of Jackson was also a spiritual awakening, the last one caused by
the old Kondratiev mechanism. The younger generation at this time developed
a Freedom paradigm as a complement to the struggle against the neoFederalists.
They also became an Idealist generation because it was a spiritual awakening.
Because of the spiritual awakening, the Freedom paradigm developed by the youthful
Idealist generation included concepts of freedom besides opposition to tariffs
and central banking that Jacksonians espoused. Spiritually-informed concepts
like Abolition also became part of the new paradigm. It is easy to see how
the different versions of the Freedom paradigm held by the youthful Idealist
generations of the 1820's and 1830's were on a collision course. Once those
imbued with this paradigm came to power, the fundamental incompatibility between
two competing versions of an unrealistic Freedom paradigm would produce the
next social moment, the Civil War secular crisis.

The action of paradigms in recent times

Table 3 presents a detailed comparison of the four most recent paradigms.
Some of the differences between Progress paradigms and Freedom paradigms are
noted. Progress paradigms tend to conflict with economic rights, usually through
restrictions of property rights. The classic example is the confiscation of
slaveowner's property by Emancipation during the Civil War secular crisis.
The next secular crisis saw confiscatory taxation and a host of regulations
restricting how private businessmen may use their property. Freedom paradigms
often conflict with traditional rights and values. For example, the Freedom
with Limits paradigm supported both Womens's suffrage and Prohibition. Similarly,
the Self Actualization paradigm supports civil rights for African Americans
and increased restrictions on the use of tobacco. On the Right, this paradigm
calls for increased freedom from environmental and safety regulations for businessmen,
coupled with restrictions on privacy and reproductive freedom. On the Left,
this paradigm calls for gay civil rights and restrictions on the right to bear
arms.

Freedom paradigms are more friendly to economic rights and market values.
As a result, freedom paradigms are favorable to financial speculation. The
Boomer's Self Actualization paradigm supported policies that favored financial
and corporate elites as shown by the enormous rise in executive compensation
after 1980. A soaring stock market was seen as evidence for the correctness
of the 1980's fiscal and monetary policy. A similar dynamic operated during
the 1920's under the Freedom within Limits paradigm Self Actualization-fueled
policies culminated in the 1997 capital gains tax cut and the stock market
insanity that followed. Stock market valuation at the end of the secular bull
market in 2000 was the highest in history. In contrast, the 1966 peak, when
the Progress through Public Action paradigm ruled, had the lowest valuation
of all secular bull market peaks.

Table 3. Descriptions of recent paradigms

Progress through public-private coop

Freedom within limits

Progress through Public Action

Self Actualization (Freedom-type)

Civic

Idealist

Civic

Idealist

Stocks priced as bonds.

Valuation notes that dividends (and prices) can grow.

Conservative valuation based on P/E.

Valuation empha-sizes potential for price appreciation

Gold Standard

Gold Exchange System

Bretton Woods

Free-floating currencies

No Fed

Fed to prevent financial crisis

Fed to promote full employment

Fed to control infla-tion and recession

Laissez faire ethic

Consumer protection Limit private power

Protection from economic mishap

Expand rights and protections

Deficits permissable only during wartime

Deficits OK during recession

Deficits anytime OK if taxes are cut

Conflict with property rights

Conflict with traditional values

Conflict with property rights

Conflict with traditional values

Republican ascendency

Democratic ascendency

Dominant generations tend to see their paradigms supported by events in the
turning after the social moment that originally created them, resulting in
their uncritical acceptance by the next recessive generation. This support
makes these post-social moment eras fairly quiescent and conservative. The
Progress through Public Action paradigm supported heavy taxation to provide
for domestic welfare and a vast peacetime military. It also supported an aggressive
foreign policy of confronting Communism. These policies had led to prosperity
and security in the 1950's. As a result the younger Silent generation by and
large supported their elder's paradigm as compliant rising adults.

These calm eras have their dark side. The policies carried out during these
quiescent turnings end up setting the stage for trouble later on, which brings
about the social moment. For example, Silent (and Boomer) support for the Vietnam
War was broad and strong in the beginning. But when the war started to go horribly
wrong, the assumptions behind the GI paradigm began to be called into question,
beginning the spiritual awakening and the development of a new Freedom paradigm.
Discontent with Progress through Public Action deepened with Watergate and
stagflation in the late 1970's. Candidate Ronald Reagan, sensing the changed
zeitgeist, announced the end of the GI paradigm with his proclamation that "Government
is the problem", that is, Progress through Public Action should be scrapped
and replaced with a Freedom paradigm.

Paradigms are not well suited to deal with events two generations after they
were formed. This is why they are social moments. The reason for this, the
model tells us, is that the dominant generation has reached an age where they
have the greatest power to shape the world in accordance with their paradigm.
The GI generation reached this apogee in 1965. And it was just around this
time that a GI president decided it was time to abolish Jim Crow in the South
and to go for broke in Vietnam. This was the beginning of the crumbling of
the Progress paradigm and the start of the spiritual awakening. Similarly,
today should be the time of peak Boomer power and the beginning of the decline
of the Self Actualization paradigm

What happens this time will be different from what happened in the sixties.
Secular crises differ from spiritual awakenings in the way the old paradigm
collides with reality. In secular crises, problems arise that cannot be successfully
addressed by the old paradigm. In the previous secular crisis, it was the Freedom-type
paradigm of President Hoover's Idealist generation that did not support the
types of market interventions that could have averted catastrophe. Thus, they
were not done and the result was the Great Depression. In the wake of the collapse
of the 1990's bubble, authorities have avoided the mistakes made the last time.
History has provided new problems, however. One is the virulent new strain
of international terrorism made all too real on September 11, 2001. Another
is the possibility that oil production will soon reach a peak, leading to energy
shortages and soaring prices. The existing Freedom paradigm with its emphasis
on individual empowerment, globalization and fluid borders, is inadequate for
these problems, just as the paradigm of Hoover's generation was for the problems
he faced. The task of the secular crisis is to come up with solutions to these
problems. These solutions will help define the content of the next progressive
paradigm.

In spiritual awakenings, it is the policies offered by elders expressing the
old paradigm that are the problem. For example, the accommodative policies
of the 1970's Fed were designed to maintain high employment in accordance with
the Progress through Public Action paradigm. When they resulted in inflation
and lower employment they were discredited and replaced by the highly restrictive
policies of the 1980's designed to control inflation. In contrast with the
1970's, the goal of today's accommodative policies is to maximize the success
of private investment and enterprise in accordance with the Self Actualization
paradigm. That is, the motivation of the "easy" Fed today is no different from
that of the 1931 Fed when they hiked rates to defend the gold standard. The
1931 policy was successful in terms of the operating Freedom paradigm of the
day. It sought to preserve the value of the currency against gold, maintaining
an even monetary field for investors and entrepreneurs. The fact that it probably
made the Depression worse is irrelevant, the outcome for the public is of importance
only for Progress paradigms, not Freedom ones.

Today, Fed policy has minimized the impact of current fiscal policy by igniting
a "counter bubble" in real estate to offset deflation of the stock market bubble.
It seeks to empower individuals by supporting Republican efforts to reduce
taxes. The possibility that present Fed policy could result in a bad outcome
is also irrelevant with respect to the Self Actualization paradigm.

Current fears about inflation, oil shocks and a repeat of 1970's stagflation
are misplaced. Not only does the Kondratiev downwave argue against stagflation,
but so does the paradigm. All these concerns are fears of a repeat of the troubles
of the spiritual awakening, the conditions that gave rise to the Self Actualization
paradigm. Like generals fighting the last war, the paradigm of the Boomers
now in leadership positions is quite suitable for combating these problems
of the past. If this is what we face, there would be no social moment. What
is coming must be a surprise and something that would never be expected based
on the current paradigm. One such change has been the disappearance of small
government conservatives amongst Republican ranks and their replacement with
religion-friendly, "big government" conservatives. These conservatives are
progressives in the same sense as the Federalists were, including their own
version of the Alien and Sedition Acts. They offer a program for the country,
a Godly vision of progress. And like the Federalists, their vision involves
plenty of goodies for special interests on their side. In contrast to the Republicans,
the Democrats haven't offered their own vision of progress. What they have
offered in recent elections is opposition to Republican-style progressivism:
pacifism, fiscal conservatism and support for an open society--views that echo
Jefferson in some respects.

There are differences too. The current Freedom paradigm contains a lot of
progressive baggage from the last progress paradigm. It calls for people to
be all they can be, to take risks to achieve success, to fulfill their innermost
desires; yet at the same time, be protected form the unpleasant consequences
of risk taking. On the Right it is failed CEOs walking away from massive capital
destruction on their watch with their own fortunes intact due to stock option
compensation and golden parachutes. On the Left it is practitioners of risky
sex who demand society cure the disease their behavior gave them.

This combination is inherently unstable. In the past, progress paradigms called
for protection from personal mishap, but also for some sacrifice of personal
freedom in exchange. Freedom paradigms insisted that with freedom comes responsibility.
It is possible that one of the tasks for this secular crisis will be to develop
new formulations for paradigms, as happened in the aftermath of the Revolutionary
secular crisis.

Mike Alexander is the author of four books: (2000) Stock
Cycles: Why stocks wont beat money market over the next 20 years; (2002) The
Kondratiev Cycle: A generational interpretation; (2003) Retiring Rich:
The ultimate IRA and 401(k) investing guide (now available in paperback
under the title Investing in a Secular Bear Market) and (2004) Cycles
in American Politics: How political, economic and cultural trends have shaped
the nation.

Michael is not a registered advisor and does not give investment
advice. His comments are an expression of opinion only and should not be construed
in any manner whatsoever as recommendations to buy or sell a stock, option,
future, bond, commodity or any other financial instrument at any time. While
he believes his statements to be true, they always depend on the reliability
of his own credible sources. Of course, we recommend that you consult with
a qualified investment advisor, one licensed by appropriate regulatory agencies
in your legal jurisdiction, before making any investment decisions, and barring
that, we encourage you confirm the facts on your own before making important
investment commitments.